The Xiaomi Mystery: How Can Something So Good Be So Cheap?

Chinese smartphone maker Xiaomi has made its mark selling iPhone-like devices for almost one-third of the price of Apple products. It began selling phones only in 2010, but Xiaomi has quickly emerged to become a leading vendor in its home market, and is now the third largest smartphone maker in the world, behind only Apple and Samsung.

According to the International Data Corp (IDC), Xiaomi had 5.3% share of the smartphone market in the third quarter of 2014, still far behind Samsung (23.8%) and Apple (12%), but unlike its rivals, Xiaomi recorded triple-digit year-over-year growth in smartphone shipments, at 211%, making it the fastest growing brand among the top vendors.

In 2014, it sold more than 61 million smartphones, with turnover more than doubling to US$12bil (RM42.81bil). All in all, Xiaomi has enjoyed success in and outside China and will continue to grow, but here’s a question that’s been playing on everybody’s lips – how can something so good be so cheap?

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1) Low-cost business model

For one thing, Xiaomi is not priced ambitiously. The smartphone maker claims to sell its device at just above costs and aims to make its margin on services. But underlining its tremendous success is its unconventional business model, which does away with traditional marketing and distribution practices.

Normally, marketing expenses make up from 6% – 12% revenue for smartphone brands. Xiaomi, which has relied heavily on the internet and social media platforms to fuel sales, has been able to do away with such costs and still become successful enough to become one of China’s hottest tech firms.

2) It banks on accessories and software

To boost profit margins, Xiaomi continues to sell the same phone models for a longer period of time. For example, it doesn’t release a new product every six months and continues selling the same model for up to 18 months.

This strategy offers the brand greater flexibility with profits and bolsters its ability to sell more accessories with higher volumes of the same model. For example, Xiaomi customers have a choice of purchasing back cover of different colours, screen protectors and batteries, when they order the device.

Also, instead of making profit from hardware, Xiaomi is more focused on offering software products and services to customers as a way to increase revenue. This is similar to Google’s approach of offering competitive products at a low cost or for free, and making money from the advertising.

One of the services that Xiaomi offers is the MIUI operating system. It is a customised version of Android installed on Xiaomi devices and currently boosts a network of 85 million users. The MIUI replaces the traditional Android app draw with side-scrolling home screens full of apps. MIUI also drives users to Xiaomi’s cloud messaging, device security, and backup features.

3) Online sales channel

To further cut down on overhead costs, Xiaomi does not own a single physical store anywhere in the world and instead, sells exclusively from its own online store offering handsets, back covers, protective cases, headphones and power banks.

By doing so, it reduces the expenses and manpower costs that entails a brick-and-mortar business, as well as a 25% – 30% retailer/distribution mark-up. To boost awareness, Xiaomi has relied on word-of-mouth recommendations by social networking sites, the media and customers, known as “Mi fans”.

Malaysians can get their hands on the latest Xiaomi devices here. Also, check out the best mobile plan options for a Xiaomi smartphone.

4) It sells in limited quantities

When the Xiaomi Mi 3 debuted in October 2013, the first batch of 100,000 units sold out in less than two minutes. Mi fans had had to wait another seven days before the company made available another 100,000 more units for sale, which were then immediately sold out again.

Releasing only a limited quantity of phones every week has been part of Xiaomi’s business strategy that has created the illusion of overwhelming demand, desirability, and has helped keep costs down. By doing so, Xiaomi also faces less risk by managing a smaller inventory, and is able to rev up production as component costs decrease over time.

However, one obvious drawback to this is that consumers may not be willing to wait and Xiaomi could lose sales as a result. In 2013, Xiaomi’s Redmi received 7.4 million pre-orders after the device had been announced, despite the limited supplies.

Xiaomi products are often called Apple knockoffs, but the company’s business model and competitive pricing is certainly putting pressure on rival vendors. It has yet to make a significant impact on the US, but Xiaomi has already begun expanding to other foreign markets, including India, where its smartphones are routinely sold out in online sales.

Elsewhere, the smartphone maker has its sights sets on Brazil, Russia and other emerging markets in South East Asia this year.